Cliffs Natural Resources: A bargain stock that’s only for the brave – David Milstead (Globe and Mail – March 9, 2013)

The Globe and Mailis Canada’s national newspaper with the second largest broadsheet circulation in the country. It has enormous influence on Canada’s political and business elite.

When the shareholders of Montreal-based Consolidated Thompson Iron Mines Ltd. sold their company to Cliffs Natural Resources Inc. in the spring of 2011, they weren’t offered the high-flying shares of the U.S. acquirer as payment. They had to settle for cash, instead.

That proved to be fortuitous, as Cliffs’ shares have since, well, fallen off a cliff. At recent trades around $25 (U.S.), they are down by more than 70 per cent.

Cliffs’ plunge may suggest that it’s a buying opportunity – but if so, it’s an opportunity only for the brave. While the shares could conceivably double from current levels, there’s also a good chance they could approach zero.

Investors seeking upside in the sector have safer options in the three international giants BHP Billiton Ltd., Vale SA and Rio Tinto Group. But they should be aware that the clouds hanging over the iron-ore sector show no signs of clearing any time soon.

Cliffs’ fall from favour provides a dramatic demonstration of how quickly circumstances have deteriorated for miners. Only a couple of years ago, raw-materials producers were riding high, largely on the strength of China’s building boom. To investors and mining CEOs, it seemed clear the Asian country’s white-hot growth would require an endless supply of materials, from iron ore to copper to previously little-known rare earths.

Cliffs, of Cleveland, Ohio, had the expertise and size to benefit from surging Chinese demand. More than 80 per cent of its revenue comes from selling iron ore to steel makers to use in creating finished steel products, making it close to a pure play in the sector.

Back in 2011, Cliffs looked at strongly rising prices for iron ore – from $30 a tonne in 2004 to $170 a tonne in 2011 – and made an all-in bet on Canada. The $4.9-billion (Canadian) deal for Consolidated Thompson gave it Quebec’s Bloom Lake project, which has the seaport access necessary to ship to Asia.

The transaction quickly soured, however. Like the entire mining sector, Cliffs has been hit hard by cooling demand from China. As skepticism about China’s future growth has increased, many commodity prices have plunged.

Meanwhile, Bloom Lake has disappointed. Per-tonne mining costs continue to top $80 (U.S.) versus the roughly $65 Cliffs said it expected. That, coupled with an inability to ramp up production, contributed to a billion-dollar writedown in January. Cliffs followed it with a dividend cut and equity offerings that whacked the stock.